Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether an amount paid in respect of pre-judgement interest in a wrongful dismissal claim is taxable to the recipient.
Position: It depends on the date of the court order or settlement.
Reasons: According to the new CRA administrative position, where a court order or settlement for wrongful dismissal is finalized on or after January 1, 2004, the pre-judgement interest will be taxable to the recipient under paragraph 12(1)(c).
XXXXXXXXXX 2004-006032
Kathryn McCarthy, CA
February 13, 2004
Dear XXXXXXXXXX:
Re: Taxation of Pre-Judgement Interest
We are writing in response to your e-mail of February 3, 2004, concerning amounts paid in respect of pre-judgement interest in wrongful dismissal claims. You inquire as to whether or not interest payments made after December 31, 2003 pursuant to a court order or settlement for wrongful dismissal finalized prior to January 1, 2004 will be taxable to the recipient.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments on the taxation of pre-judgement interest under the Income Tax Act (the Act).
Interest income, including pre-judgement interest, is generally taxable and included in income pursuant to paragraph 12(1)(c) of the Act. In the case of pre-judgement interest, however, the Canada Revenue Agency (CRA) has the following administrative exceptions. Pre-judgement interest related to awards for personal injury, death, and retroactive worker's compensation is not considered taxable.
Prior to 2004, there was also an administrative exception for pre-judgement interest on wrongful dismissal awards. The CRA's former administrative exception for pre-judgement interest related to court orders or settlements for wrongful dismissals finalized prior to January 1, 2004, and hence such interest was not considered to be taxable. However, the new CRA administrative position is that pre-judgement interest related to court orders or settlements for wrongful dismissals finalized on or after January 1, 2004 will be taxable to the recipient pursuant to paragraph 12(1)(c) of the Act.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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